Summary

Kenya loses billions of shillings in tax revenue and jobs to bootlegging of cigarettes.

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Kenya is among countries that have made great strides in controlling prevalence of illicit tobacco trade, a new World Bank report shows, citing implementation of tight measures by government.

In the report titled ‘Confronting Illicit Tobacco Trade: A Global Review of Country Experiences,’ the World Bank says Kenya has invested substantially in taxation and product tracking systems of controlling illicit trade in tobacco products since early 2000s.

“Kenya has invested substantially in illicit trade in tobacco products control and reaped impressive rewards.

“The country’s new excisable goods management system for tobacco and alcohol products was introduced in 2013-14 and has proven both more effective and less expensive than the previous system,” says the World Bank.

The findings of the study offer hope for Kenya policymakers in reducing prevalence of tobacco, a product that kills at least half of long-term smokers and accounts for more deaths each year than HIV/Aids, tuberculosis, and malaria combined.

The efforts of the government are all the more impressive, given Kenya’s broader difficulties in addressing accountability issues in public-sector management, the report further says.

World Bank lauds Kenya for strengthening both the system and enforcement, including the related penalties and tobacco tax administration.

The report adds that the approach of consensus building through key stakeholder participation have proved to be much more beneficial than piecemeal measures that only have short-term effect.

“The latest intervention, based on the modern data-driven technology in track and trace systems (TTSs), combined with electronic cargo monitoring of exports, seems to be the most effective, as it is more resistant to tampering and reduces reliance on human capacity.”

Initially, government started by disjointed solutions which were expensive to implement yet the impact was so little, according to the study.

However, World Bank says, the TTSs solution has helped increase the size of the legitimate cigarette market at a cheaper cost.

“The positive experience with the system had good spillover effects, allowing Kenya to expand the system to other excisable goods, as well as goods, from beer to cosmetics, subject to counterfeiting,” notes the World Bank.

The publication presents country and regional case studies in more than 30 countries, and provides practical input regarding how to address tobacco illicit trade.

The worldwide economic cost of smoking is estimated at least $1.4 trillion (Sh140 trillion) per year, with almost 40 per cent of these costs occurring in developing countries.

Despite Kenya’s successes, the World Bank cautions that policymakers need to stay vigilant because of the ever-adapting methods of supplying the illicit cigarette market and because of the grave risks of relaxing enforcement.

The World Bank observes that the government should invest in regular assessments of the situation, including estimates of the size of the illicit tobacco market for proper assessment of impact of the efforts to control the market.

For more success, Kenyan authorities are being advised to consider ratifying the Protocol to Eliminate Illicit Trade in Tobacco Products. This would help the government secure regional collaboration that would reduce the illicit trade both domestically and in neighbouring countries, according to the report.

Kenya is further advised to implement punitive penalties on illicit traders and also raise taxes to control consumption.

“It is important that the tax per cigarette be increased more quickly than inflation so that cigarettes become less, not more affordable over time. This will also bring fiscal and health benefits to the country,” says the report.

In the early 2000s, Kenya was perceived as an illicit cigarette transit point in East Africa, while Tanzania was the main source of the contraband.

The Democratic Republic of Congo, Sudan, and Uganda were the main target destinations, according to 2013 Euromonitor report on illicit trade in tobacco products.

In 2012, Kenya Revenue Authority estimate claimed that the illicit cigarette trade was costing the country more than Sh80 billion ($790 million) in jobs, tax revenues, and investment losses.

Since 2003 when Kenya carried out audit to take steps in addressing cigarette tax avoidance and tax evasion, progress has been seen.

cargo monitoring

First, the government changed the tax regime from an ad valorem system using the ex-factory price to a specific tiered tax system using retail prices to define the four progressive tax categories. This was to address tax evasion related to the under-declaration of the value of cigarettes.

It also introduced paper tax stamps on all cigarette packs sold in the domestic market. This was to eliminate the under-declaration of production destined for the domestic market.

In 2010, the taxman carried out a major review of the effectiveness of tax stamps to eliminate counterfeiting of stamps.

The new stamps were serially numbered and came with features such as coat of arms and the KRA logo.

All local cigarette manufacturers were required to be licensed, while all tobacco and cigarette importers were required to be registered with the KRA.

“The new measures addressing the illicit cigarette trade and introduced in 2008—2010 paid off, as legal sales of cigarettes and cigars expanded by 67 per cent in 2010 relative to 2009, and tax revenue went up as well,” says the World Bank.

The launch of cargo monitoring system has also helped Kenya develop into a regional manufacturing centre supplying markets in Mauritius, Rwanda, and Uganda, where British American Tobacco had ceased local production in the 2000s.

Apart from changes in tax regimes, the KRA also introduced excisable goods management system for tobacco and alcohol products.